UPDATE 2-Strong Luye Pharma debut boosts prospects for 'China orphan' firms

Wed Jul 9, 2014 2:55am EDT

* Luye Pharma one of scores of firms expected to relist in HK, China

* Private equity hopes to emulate Sihuan Pharma performance

* Listing values Luye at $3 bln vs $515 mln at the time of delisting (Writes through with data on China orphan firms, lawyer comment)

By Stephen Aldred

HONG KONG, July 9 (Reuters) - Shares in China's Luye Pharma Group Ltd jumped as much as 18 percent in its Hong Kong market debut on Wednesday, bolstering prospects for other so-called "China orphan" firms that had been previously listed elsewhere.

"China orphans" is a phrase used by bankers to refer to companies that were once listed in New York and Singapore but were largely neglected, particularly after accounting scandals in 2011 caused investors to shun most foreign-listed companies of Chinese origin.

Many are now seeking to make it big back home where investors are more familiar with their business models and demand for such firms is more vibrant. They have been inspired by the successful 2010 relisting of Sihuan Pharmaceutical Holdings Group Ltd and Luye, like Sihuan, has gotten off to a roaring start.

Luye's IPO raised $760 million and at the top end of Wednesday's trading range it had a market value of $3 billion. That is nearly six times greater than what CDH Investments, Citic Private Equity Funds Management and New Horizon Capital Partners paid for it in 2012.

"We know there are a number of privatised companies that are in various stages of preparing for their relisting," said Paul Boltz, a partner at law firm Ropes & Gray, which has advised on a number of deals where Chinese firms were taken private.

"I would expect to see a wave of these relistings over the next couple of years," he said.

Luye Pharma, whose products include cancer and cardiovascular drugs, rose as high as HK$6.98 compared with the IPO price of HK$5.92. It last traded at HK$6.65.

It was the second most actively traded stock on the Hang Seng Index with some 218 million shares, or 6.5 percent of outstanding shares, changing hands. The Hang Seng fell 1.5 percent.

Chinese firms first set out for Singapore and New York, attracted by looser listing requirements and the ability to conduct reverse takeovers, but often failed to attract coverage from equity analysts. These days, most U.S. investor attention for Chinese companies is focused on Internet stocks.

There have been 53 actual and planned delistings of China firms listed in the United States and Singapore including 31 backed by private equity, according to Thomson Reuters data dating back to 2010. Roughly two-thirds of those private equity-backed transactions were led by China buyout firms.

PHARMA PROSPECTS

For private equity, the rewards can be great.

Morgan Stanley Private Equity Asia (MSPEA) delisted Sihuan from Singapore in late 2009 at a valuation of around $500 million, before relisting it in Hong Kong a year later with a market cap of around $3.7 billion, according to a source with direct knowledge of the matter.

Sihuan's market value has since grown nearly 80 percent to $6.7 billion, not too far off China's biggest listed drugmaker - Shanghi Fosun Pharmaceutical Holdings Group Ltd which has a market cap of $7.2 billion.

MSPEA has not fully exited its investment but expects to make around eight times its initial investment when it does, said the source, who declined to be identified as details of the investment have not been made public.

Luye's shareholders sold $253 million through the offering while the rest of the proceeds went to the company. For CDH the successful Luye debut is a welcome relief after the IPO of pork giant WH Group Ltd was cancelled as mismanaged pricing and other woes led to weak investor demand.

Investors in both Sihuan and Luye are also buying into strong growth prospects for China's drug market, although the sector remains underdeveloped and highly fragmented.

The industry grew at a compounded annual growth rate of 19.3 percent in the five years to 2012 to be worth $69.7 billion and is expected to grow at a similar pace to reach $166 billion by 2017, according to consultancy firm Espicom.

Luye's net profit in 2013 surged 86 percent to 328 million yuan ($53 million) on revenue of 2.52 billion yuan.

UBS AG, Citigroup and Citic Securities International were joint sponsors of the Luye IPO. UBS, Citigroup and CLSA were joint global co-ordinators and bookrunners.

($1 = 6.1963 Chinese Yuan Renminbi) (Additional reporting by Denny Thomas; Editing by Edwina Gibbs)

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